What are the Fundamental Success Factors for a Family Office?

Abstract

Among the fundamental success factors when founding a single family office are the size of the family’s pooled assets, the ability to formulate a vision and pick loyal employees willing to live out the declared values, an ability to simplify down to two to four asset classes and a dedication to avoiding conflicts of interest. When joining multi family offices, additional consideration must be given to the ownership role the family wishes to hold within that office (co-owner or pure client). This chapter also includes a checklist for the family to assess its own situation and an interview with Klaus Kuder, whose firm offers consulting to multi family offices in Germany.

Klaus Kuder first encountered the world of family offices in 1994, during a stint in New York as a consultant and administrator for private wealth management at Deutsche Bank. He held that position through the end of 1998, when a client invited him to oversee the comprehensive restructuring of that client’s portfolio. In 1999, Kuder became the founding director of the Deutsche Family Office GmbH, the family office product from Deutsche Bank in Germany. It was the predecessor firm to the Wilhelm von Finck Deutsche Family Office AG and the Deutsche Oppenheim Family Office AG, for whom he served as chairman of their respective boards. Klaus Kuder left the Group in 2014. Today he is managing director and partner at Kuder Familypartner GmbH, which he founded in November 2014 as a provider of consulting services to notable entrepreneurial families. He sees in his firm a unique service that combines the benefits of a single family office with the advantages inherent to a wider multi family office. Klaus Kuder is a founding member of the German Association of Independent Family Offices.

From Germany: “A family office will sink or swim based on the qualifications and aptitudes of its personnel.”

Interview with Klaus Kuder

This interview touches on differences between single and multi family offices, family governance structures and typical mistakes when founding a family office.

This interview was conducted by Peter Preller.

Mr. Kuder, you are considered one of the pioneers of the German family office scene. Long before the concept had become popular, you were already working as a managing director setting up and leading a bank-bound family office and went on to coordinate the fusion of three multi family offices. You then served as chairman for that large new organization. In 2014 you founded your own multi family office, Kuder Familypartner GmbH. What moved you to take that step?

Klaus Kuder: My idea was to offer families a service that combined the desire for their own discrete, individual single family office with the wider spectrum of options and greater reach of a multi family office. What I had repeatedly found in the past was that single family offices tended to concentrate on specific areas, usually based on the structure of their assets or the specific dynamics at play within the family. Yet there are risks in becoming overly specialized, namely the threat of missing out on opportunities that don’t appear at first glance to fit within the family’s scope of interests. My idea is to bridge this gap. By working together closely with multiple families, we formulate ideas and approaches that can potentially be of interest for the other clients. This leads not only to a broader pool of expertise, but also opportunities to join in on business and investment ideas that leverage the economies of scale to the benefit of the families. In fact, the interplay between multiple clients quite often awakens a set of impulses and considerations that simply don’t exist in single family offices, or at the very least which potentially cannot be articulated in quite the same way when taken in the context of a single wealthy family. This connection between proximity and individuality, paired with a broader reach and independence, is at the heart of my company’s concept.

Based on your experience, what is the difference between the services offered by bank-bound and by bank-independent family office structures?

KK: The key factors are positioning and the business concept. A family office stands for comprehensive consulting that is not captive to any product. This is all the more important if the family office owner is known for a specific product or service, such as a bank, fund manager, tax advisor or attorney. In this case, the family office must be structured to complement those strengths if it is to be viable for the long term. Historically, banks in particular have frequently encountered problems in finding a sustainable and credible balance between their banking and their family office services. UBS, Berenberg, Lampe and the houses of Hardy, Grunelius and Hauck & Aufhäuser are just a few examples where the family office concept has failed over time due to a lack of clear delineation from their classic banking business. They eventually squandered the trust of their family office clients and, ultimately, the managers at their parent firms.

You have to set a clear accent: What does the family officer stand for, and what does the bank stand for? The points of difference and overlap must be clear and transparent. Otherwise it becomes difficult to credibly establish the independence that one would expect from a family office. In a pure family office, the consultants are in my opinion focused solely on the needs of ownership, regardless of which topics or asset classes are being reviewed.

Beyond this, differences can also be observed in terms of which services are offered for a given family office, such as real estate management, controlling and consulting on controlling, finance, tax, legal and wealth management.

What special challenges did your company face when it was first founded, and which ones do you anticipate as it matures?

KK: The business model and philosophy are of central importance. As already mentioned, I decided to put the focus for my company on comprehensive consulting, by which in this case I mean: generalist. From the start, I eliminated the potential conflicts of interests related to supplementary specialized services. Otherwise special challenges invariably arise that, unless handled quickly and with tremendous discipline, can lead to existential conflicts of interest. Beyond this, the desired business model must be harmonized with the regulatory requirements. That’s an aspect that shouldn’t ever be underestimated.

What challenges do you see for the future?

KK: Whatever the type of growth, it is essential that the focus remains on the client. Ultimately, we as family officers are obligated to the well-being of our clients and are compensated for this service. Families expect that their advisors will keep up to the minute on the latest developments in a wide range of important, relevant themes. For example, a growing number of investors are expressing anxiety about their ability to preserve their wealth at all, a reflection of the increasingly failing trust in the stability of cash value and in our currencies. In the past, factors like the Cold War or hyperinflation caused a deep-seated sense of unease; today it is terror, blackmail, etc. While the family office cannot deliver a quick answer to these fundamental questions, its most basic purpose is in fact to work together with the client to investigate, prioritize and act in an effective manner.

What are the biggest mistakes that one might make during the founding phase of a single or multi family office, and what considerations can help avoid them?

KK: There’s a clear tip in this regard: Before you move to actually found anything, you need to be clear on those things for which your family office will really be responsible. This means formulating three to five objectives for the family office to pursue. It sounds simple, but it’s not. You’ll quickly find that it’s much simpler to put 20 to 30 wishes to paper than narrowing it down. But in my view, that’s the wrong approach because you’re bound to get bogged down. If you try to balance too many plates at once, it’s highly likely that a few are going to fall and break. So while it’s a simple piece of advice, it’s also a crucial one. Whether the family office should focus, for example, on private equity investments or perhaps instead on bookkeeping and asset reporting will have a major impact on how that family office is structured, in terms of personnel and technical infrastructure. Along the same lines: trite as it sounds, the family office must keep an open line to all participating family members, not just the leader of the family. The children may have other points of interest and expectations of the family office. These must absolutely be accounted for if each family member is to identify with the family office and is to enjoy the greatest degree of acceptance possible. This is especially important because the family office, if well managed, can make a significant long-term contribution to cohesiveness within the family.

How do you avoid potential conflicts of interest between the families?

KK: There should be clear rules of engagement and the greatest possible degree of transparency. This is important not just when managing the interactions between multiple clients, but also within an individual family office mandate, including a single family office. A lack of transparency leads to mistrust. Mistrust destroys acceptance of the family office and robs it of the foundation it needs to do business. And nobody should want that.

What role should family governance play in the range of services a family office offers?

KK: Questions of family governance form a decisive point and in essence serve as the foundation for a whole range of other topics. The family office is part of governance and can help keep the family and its wealth together. If it’s handled poorly, it can also lead to greater splintering. What is the relationship between the family and family office? Who controls it? What role do family members play in the steering of the family office? How is the family office positioned vis-à-vis the family’s operating business? What overlaps exist, and which of these are desirable and/or undesirable? These are just a few of the aspects that play a role in governance. When a family office has been positioned effectively, it can serve as an anchor for the family and as a point of identification. Otherwise in the long term it becomes a foreign body, with neither acceptance nor trust. That makes a big difference in large or old family clans in particular, where centrifugal forces tend to grow bigger and stronger with each generation; that force pulling the family apart needs to be managed and the sense of unity must be preserved within the family.

What would you recommend families think about when they are contemplating the founding of a single family office, or joining a multi family office?

KK: Beyond the business model and the formulation of goals and desires for the family office, recruiting also plays a major role. The aptitude of the family officer often ends up deciding the success or failure of the family office. Training, experience and qualifications are important. Just as important is empathy on the part of the advisor and his or her ability to engage with the family. This may sound simple but it isn’t, because decisions aren’t always made on a rational basis. Even this simple example shows that the selection process for a suitable family officer must follow certain rules. The fit at a personal level can, in borderline cases, prove significantly more important than their expertise on paper.

Let’s assume that a family has the type of asset volumes that lend themselves to economic operation of a single family office of its own. What criteria would indicate to you that they would be better served founding a separate single family office, and when would you recommend joining a multi family office?

KK: The question that the family must first answer is: Do we have the will and desire to create our own structure, including the management and monitoring that go with it? If you’re creating your own organization, there must be a strong willingness to delegate tasks to external service providers. With that said, having your own family office can also promote greater closeness, individuality and discretion.

What factors matter in assessing the human resources of a family office?

KK: HR decisions—qualitatively and quantitatively—should reflect the tasks and the services the family wants their family office to handle directly on its own. Beyond this, the complexity of the family also impacts the personnel structure.

What role does the size of the portfolio to be managed play, as well as the number of family (households) and asset classes to be managed?

KK: The size of the wealth to be managed is not necessarily the decisive variable. A large pool of wealth in the billions can be structured simply, such as if a large portion is in just one stock or is tied to the family’s operative business. The number of family members requiring support and the asset classes are more likely instead to impact the technical and HR constellation of the family office.

Should a family office retain its own experts for this, or buy in that expertise from third parties?

KK: I would fundamentally recommend that services be purchased on the market where possible, as this is better and more affordable and not in conflict with internal goals. Services tailored to the family and sensitive issues by contrast are generally better handled internally.

By your reckoning, what are the minimum requirements for IT structure (hardware and software)?

KK: This depends on which IT and personnel structure is required based on the physical office layout. I would break it down as follows: The first tier involves system reliability and stability within a secured environment. Next come issues such as individualized software solutions, interfaces to other programs, including real estate management and bank and portfolio management software. The third tier then involves mobile solutions to allow access to one’s own asset data at any time. This is a requirement that I’ve increasingly been hearing about, formulated in particular by younger family members. One can imagine that the provision of sensitive asset data to external sources brings with it very specific requirements for data protection and compliance.

What costs would you expect to be associated with operating or joining a mid-sized, privately held family office? Is there a direct correlation between the costs and the size of the assets being managed?

KK: Costs vary greatly and are hard to generalize. With a minimum set-up of one to three persons (senior executive, junior executive, assistant) and a stable IT infrastructure, costs of between €500,000 and €1 mn. per year can be expected, depending on competency, experience and seniority. If specialized knowledge or special experience is required, then costs can rise significantly above that mark. In any case, it can be said that personnel costs always represent the largest cost point in the overall budget for a family office. But as mentioned: A family office will sink or swim based on the qualifications and aptitudes of its personnel.